ECB vice president: Greece will not have to leave the euro if it defaults

Vitor Constancio, vice president of the European
Central Bank pictured during his first press conference following
the monthly ECB board meeting in the new ECB headquaters on
December 4, 2014.Thomas Lohnes/Getty
Images

FRANKFURT (Reuters) - A country that defaults would not have to
leave the euro, the European Central Bank's vice president said
on Monday, in frank remarks about Greece that also touched on
possible capital controls and showed how acute Athens' problems
have become.

Speaking as Greece ordered public sector entities to transfer
idle reserves to the central bank to help with a cash squeeze,
Vitor Constancio discussed the possibility of a debt default and
controls on the movement of money, saying neither necessarily
meant a departure from the currency bloc.

"If a default will happen ... the legislation does not allow that
a country that has a default ... can be expelled from the euro,"
he told the European Parliament, saying that Greek banks had been
told not to increase their exposure to the state to avoid "a
possible credit event regarding the state".

The comments from the typically reserved Constancio underscore
the seriousness of Greece's predicament and are the most open yet
from the ECB, which is providing 110 billion euros of liquidity
to the country and its banks.

Constancio also touched on the possibility of capital controls.

"Capital controls can only be introduced if the Greek government
requests," he said, adding that they should be temporary and
exceptional. "As you saw in the case of Cyprus, capital controls
did not imply getting out of the euro."

Constancio underscored ECB support for Greece, telling lawmakers
he was sure it would stay in the currency bloc.

"We are convinced at the ECB that there will be no Greek exit,"
he said. "The (European Union) treaty does not foresee that a
country can be formally, legally expelled from the euro. We think
it should not happen."

As it stands, the central bank is approving an ever growing
amount of emergency funding for Greece's lenders. While
Constancio said this could not continue regardless of the
circumstances, he hinted that the ECB would be loath to pull the
plug.

"If the state defaults, that has no automatic implications
regarding the banks, if the banks have not defaulted, if the
banks are solvent and if the banks have collateral that is
accepted," Constancio said.

Greece is close to having to repay the International Monetary
Fund about 1 billion euros in May and officials at the ECB are
growing concerned.

The ECB has analyzed a scenario in which Greece runs out of money
and starts paying civil servants with IOUs, creating a virtual
second currency within the euro bloc, people with knowledge of
the exercise told Reuters last week.